There's No Formula for Fixing Detroit, and That's a Good Thing

Harvard Business Review

The news of Detroit's bankruptcy has brought countless explanations of what went wrong, some of them pretty interesting. But the main point of a bankruptcy — especially this bankruptcy, which has been looming for decades — is to get a fresh start.

So it's been dismaying to see how little attention has been paid in the past week's news coverage to the fact that central Detroit is already in the midst of fresh start, a revitalization that feels far more organic and durable than past top-down efforts like the construction of the Renaissance Center in the late 1970s and the arrival of casinos in the late 1990s (although the casinos do appear to pay the bulk of the city's bills at the moment). Decrepit buildings in downtown and midtown are being renovated and converted into loft apartments, hotels, restaurants, and offices. Compuware and Quicken Loans have moved their headquarters and thousands of employees from the suburbs to the city. There's an incipient venture-capital and startup scene, and lots of small creative businesses. The area's pro sports teams are almost all back downtown. Young, upwardly mobile people are actually moving to Detroit.

At the moment, this renaissance is almost completely disconnected from what's going on in the rest of the city. A small group of affluent, well-educated Creative Classers (and a larger number of occasional suburban visitors) has occupied an island in a sea of economic despair. One telling factoid: Detroit had been without a major chain supermarket since 2007. Now it has one in midtown, and it's a Whole Foods! (For non-U.S. readers, Whole Foods is a high-end natural foods chain long known by the nickname "Whole Paycheck.")

Outside of this rejuvenating core and a few residential neighborhoods that are still holding strong, Detroit is an underpopulated, crumbling mess. In 1950 the city had more than 1.8 million inhabitants; this year the population will probably slip below 700,000. Providing city services like police protection and garbage pickup across 139 ever-emptier square miles keeps getting more expensive and difficult (Detroit now has much lower population density than famously sprawling Los Angeles — although it's still denser than more recent boomtowns such as Houston and Phoenix). Just since 2000, the city has lost 26% of its people, with the white flight that began Detroit's decline in the 1950s long since overtaken by an exodus of middle-class African-Americans.

Detroit Population Chart

Those left behind are increasingly those who can't get out — with a per capita income of just $15,261 and 36.2% of the population below the poverty line, Detroit is now by most measures the poorest big city in the country.

It has also been uniquely dysfunctional. Cities live or die as economic entities, and Detroit's economy of course grew up around its automotive entrepreneurs. But over time the automakers evolved into change-averse business bureaucracies. Only General Motors remained based in Detroit, and while it certainly tried to help the city it's probably fair to say that its executives had little idea how. And while the Detroit area spawned new businesses — Compuware, Pulte Homes, Rock Financial (which took the name Quicken Loans during a brief stretch when it was owned by Intuit) — they were all creatures of the suburbs. To an extent unparalleled in any other major American metropolis, private economic activity in metro Detroit came to almost completely bypass the actual city. This was very much a racial divide; whites avoided the city, while blacks gravitated toward the government jobs that were the best things on offer within the city limits. The result was a city governing class clueless about and to a certain extent disdainful of economic reality and a regional economic elite with few ties and little loyalty to the region's main city.

Among America's ten biggest cities in 1950, two others — Cleveland and St. Louis — suffered population drops similar to Detroit's. They've also been troubled, and Cleveland even defaulted on some bank loans in the late 1970s. But on the whole the cities themselves weathered the demographic shock far better than Detroit. St. Louis even gained population last year (just 103 people, and that's just a Census Bureau estimate, but still, it's something). That's partly because they're older cities with smaller land areas to manage. But it's also because they remained central to regional economic life. Lots of businesses and other important economic institutions stayed in the cities, and the racial polarization between city and suburb was never as absolute as in Detroit.

So what do you do about that all that? Last fall, I paid a visit to the Creative Class island within depressed Detroit for the Techonomy Detroit conference at Wayne State University, and I can attest that people there are well aware that urban rebirth will take a lot more than a few downtown restaurant openings. I can also attest that they don't really know what it will take. I moderated a panel titled "Is Detroit the Next Berlin?" and the general consensus was that no, the huge inflow of federal money and artsy types from all over that converted the once-depressed German capital into a global hotspot was not going to be replicated in Detroit — although a few artsy types were already there and some federal money sure would be nice. So here are some other paths:

Immigration. New York Mayor Michael Bloomberg made headlines two years ago by arguing that Congress ought to "pass a law letting immigrants come in as long as they agree to go to Detroit and live there for five or 10 years, start businesses, take jobs, whatever." That apparently isn't going to happen, and recent immigration, while surely a positive for Detroit, hasn't been on the scale that has helped revitalize big cities nearer the coasts. In fact, the city has so far attracted far fewer immigrants than its suburbs — which does indicate that there's opportunity for improvement.

Shrinkage. Not long after NBA Hall of Famer Dave Bing became Detroit's mayor in 2009, reports surfaced that he was thinking of bulldozing a quarter of the city. Reality has turned out to be less dramatic, but the city is definitely working to reduce its footprint — to abandon some neighborhoods in order to focus on making others thrive. That could help with cutting costs and improving services, but — groovy urban farms aside — it's not what you'd call an entirely positive development.

Policy innovation. The most thought-provoking thing I've read about Detroit in the past week was a blog post by The Century Foundation's Jacob Anbinder sketching out four possible government policy fixes: (1) let property owners (about half of whom aren't paying their taxes at the moment) choose what their taxes are spent on, (2) make city workers live in Detroit (less than half do, and this is something Mayor Bing has already been talking about), (3) let wealthier municipalities temporarily take over parts of Detroit for economic development purposes, which is allowed under Michigan law, and (4) do away with the region's ridiculous public transit divide in which the suburbs and the city run separate and disconnected bus systems. Are these the right prescriptions? I don't know. But bold experimentation certainly has to be part of the picture.

Bankruptcy. I'm guessing Chapter 9 has been inevitable for Detroit for a while, but the timing and specifics of it were forced on the city by Republican governor Rick Snyder, a former business executive (at Gateway Computers; remember them?) and venture capitalist. Snyder seems like a pragmatic guy who genuinely wants to enable an economic rebirth for Detroit, and his decision has been welcomed by the city's new entrepreneurs. Bankruptcy is, after all, a way to get out from under past commitments that they had nothing to do with. But a lot of those commitments were to municipal workers, who (the ones who actually live in the city, at least) make up much of the Detroit's remaining middle class. The most surprising elements of the city's bankruptcy filing have been the claims that Snyder-appointed Emergency Manager Kevyn Orr has made about the dire state of the city's pension funds; there's widespread suspicion that he's overstating the problem. That's got to be at least partly a negotiating tactic, but it's a dangerous game Orr is playing. It's not that city pensions should be untouchable — they definitely won't be, now that a bankruptcy judge is likely to be calling the shots. But the great tragedy of Detroit over the last half century has been an inability to share responsibility and opportunity across racial and municipal lines. If the bulk of Detroit's bankruptcy costs are borne by a bunch of (mostly black) city workers for the benefit of a bunch of (mostly white) entrepreneurs and corporate workers, what kind of restart will that be?

Money. In a much-debated New York Times op-ed a few days ago, Steven Rattner — who managed the Detroit automakers' successful bankruptcies in 2009 — argued that the only feasible way forward is for the state of Michigan (and to a lesser extent the federal government) to help Detroit out. Michigan has had a pretty awful decade, but it's still in much better shape than Detroit. And it seems like many of the state's leading businesspeople, and its governor, have come around to the idea that the state can't thrive again until its biggest city is on the comeback trail. There are limits to what money can do, and I imagine that anything that could be labeled a "bailout" would spell political suicide for Snyder. But hey, maybe he's itching to go back into the VC business so he can invest in Detroit.

Entrepreneurs. The downtown Detroit boomlet is to a remarkable extent the work of one wealthy risk-taker, Quicken Loans chairman and co-founder Dan Gilbert. According to the blog Detroit Unspun, Gilbert and his firm Rock Ventures now own or control more than 30 properties downtown, totaling 7.5 million square feet. That's a huge bet on a far from sure thing, and while sometimes I think entrepreneurship gets oversold as a cure for economic ills, it's hard to think of anything that would do more to get Detroit going than the presence of a couple more Dan Gilberts, and a few hundred or thousand mini-Dan Gilberts.

Does all this add up to a formula for fixing Detroit? No — and you may have noticed that I completed avoided the topic of fixing Detroit's schools, which is clearly crucial yet diabolically hard. But to a certain extent the lack of formula is the point. A fresh start for Detroit means entering uncharted territory — and that's exciting.

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